Despite the stubbornness of inflation, you have likely noticed a welcome drop in gas prices over the past couple of months. Perhaps it’s sad to get excited over $3.50ish a gallon; but hey, it’s better than $5. The bigger question is if that downward trend will continue.
Why gas prices went up
Although many prices crashed in the early days of the pandemic, the average price at the pump for Americans only took a bit of a dip. With commuters and minivan moms and city buses almost universally out of commission at that time, you would expect gas to crash harder than almost anything else.
The energy industry is huge and messy, of course. So for the sake of simplicity, let’s focus on one of the biggest factors in the price of gas: the price of oil. In the wake of the pandemic, there were several major factors that made oil more expensive, and gas with it:
- Refinery closures: Like some other businesses, many oil refineries decided to quit while they were ahead instead of trying to ride out the pandemic. Consequently, gasoline production stayed low even after lockdowns were lifted.
- The Russia/Ukraine conflict: As you likely know, Russia is a major source of oil for Europe and even the world at large. But that oil stopped making it to consumers as 1) Western allies started to boycott it and 2) Russia retaliated by cutting off supply to other areas.
- Production cuts by OPEC: Amid all the other drama, OPEC drastically cut its oil output with the onset of the pandemic, aggravating all the other problems.
Add all of that to the other inflationary pressures of the last couple of years, and suddenly $5.00 gallons are a nightmare come true. Until…
Why gas prices came back down
Despite all the buzz about OPEC and Russian oil, the fact remains that we Americans are lucky to have a massive oil industry right here at home. Even with some of our refineries closing, this has managed to keep our gas prices from getting really out of control.
In particular, we can thank our Strategic Petroleum Reserve, the largest stash of crude oil in the world. When things got especially hairy about a year ago, the Biden Administration decided to hook a firehose up to that huge reserve:
Along with the gradual reopening of a few closed refineries, this may be the single biggest reason why prices have eased. But the obvious scary part is how much the reserves have depleted. Clearly the firehose cannot keep running for much longer… so what happens when it turns off?
Where gas prices may be headed
The global energy landscape is still a mess, to put it bluntly. Western allies have imposed a price cap on Russian oil, which may backfire if Russia retaliates by refusing to sell. China’s voracious oil consumption has been choked off by extreme lockdowns, but those may loosen up soon (or not). OPEC continues to be stingy, and there is no telling how long they will keep it up.
Meanwhile at home, the artificial cushion of our petroleum reserves is about to go away… potentially making us more reliant on the global oil market. But our production capacity might be improving, and big electric vehicle subsidies could reduce demand for gas in the long term. And as a bonus, Americans tend to drive less in the winter.
With all this in mind, if I had to call it I would guess that we are about to see gas prices go back up. If nothing else, everything we have discussed here points to the ongoing value of oil – and gasoline – as commodities. That value may not last forever; but it does not seem to be going away anytime soon, either. Bad news for your wallet, perhaps… but potentially good news for your portfolio.